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A Power Player Takes Its Lumps

Shaw Group whiffed, but future contracts will give it a lift.

The earnings of engineering and construction companies are typically as lumpy as Thanksgiving gravy. And when one of these companies puts its numbers on the table, no one's in a thankful mood. Yet those are exactly the times when Fools should think about pouring more shares into their portfolios.

Take the latest results from Shaw Group(NYSE:SGR). The company had a terrific second fiscal quarter in pretty much every respect, yet the stock got rocked.

The fossil- and nuclear-power segment was fired up, as usual. Southern(NYSE:SO) contracted for two nuclear unit additions in Georgia, while two other domestic utilities signed letters of intent for up to two units each. These projects, which have both authorized the procurement of long-lead-time items, are moving forward as if Shaw and its part-owned partner Westinghouse had contracts in hand. Yet these deals, worth roughly $4 billion apiece, don't go into backlog until then. Neither does the very recent $9 billion U.K. coal-fired power alliance with RWE, for that matter.

The point here is that even though official new awards were lower for the quarter than they were last year, Shaw's unbooked but likely projects are worth more than the company's entire $14.2 billion backlog.

The company's maintenance segment, which counts Exelon(NYSE:EXC) as its largest nuclear customer, is performing well, and Shaw points to its half-share of the market for nuclear-plant outage work as a source of comfort for utilities thinking about ordering up fresh nukes. Energy and chemicals, the segment that builds refineries and petrochemical plants, is also hard at work on a polysilicon plant for Hoku Scientific(NASDAQ:HOKU).

The only clear disappointment was Shaw's environmental and infrastructure business, but even in that case, the news isn't so bad. The segment's EBITDA fell short of management's expectations, but the losses were mainly writedowns of non-core businesses, such as a joint venture with KB Home(NYSE:KBH). This segment, which continues to clinch contracts from corporate clients including Waste Management(NYSE:WMI) and General Electric(NYSE:GE), should turn in a better back half. A huge federal hurricane-protection project in Louisiana will move things in the right direction.

In all, Shaw Group appears to be on extremely solid footing as a power-plant builder. The rest is simply gravy.